Risk-Off Flight to Euro

The euro has oscillated in a relatively narrow 1.08 to 1.10 range in recent weeks, as investors have sought refuge in established safe haven assets in response to a surge in global volatility caused by financial turmoil in China. Steep corrections in currencies like the Russian rouble (-8.8%) and South African rand (-6.9%) in December revived demand for the euro and the yen. The euro had lost around 10% of its value in the first eleven months of 2015, reflecting policy divergences with respect to the US, which look likely to continue in 2016. Amid much fanfare, the European Central Bank (ECB) under-delivered in terms of adjustments to its program of stimulus last month. Only a marginal reduction was made to the deposit rate, while quantitative easing was not expanded, only extended to March 2017 and broadened in terms of the type of debt instruments that qualify to be purchased. The ECB may do more to aid the recovery in 2016, especially in view of the weak oil price outlook, which keeps inflation depressed.

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